COVID-19 provides stark reminder on need to act on climate change

"Sustainable finance principles are moving out of the fringe and into the mainstream. As a result, companies that fail to adequately plan for the longer-term environmental crisis do so at their peril."

The stark message came from two sources: the Liberal government which imposed climate-related conditions on its financial assistance to large corporations, and from Norway’s $1-trillion sovereign wealth fund which announced it will divest its holdings in Canada’s carbon-intensive oil sands companies.

The decisions announced in Ottawa and Oslo may appear un-related but they are part of a growing “sustainable finance” agenda that aims to re-allocate capital away from firms that are part of the climate change problem, and to plow money into companies and technologies that offer solutions

The federal government and Norges Bank Investment Management added a critical element to the push for more disclosure of climate-related impacts on corporations. Not only are companies expected to report on risks and opportunities, they are to demonstrate that their business plans are consistent with the transition to a low-carbon world.

The story goes well beyond the oil industry. It involves any company that faces long-term climate-related risks — whether due to flooding and fires; carbon taxes and others policies, or disruptive technology. Banks, insurance companies, utilities, airlines and large manufacturers are all implicated.

While many publicly-traded companies do provide some analysis of the issues they face, few — if any — meet the standards of the Task Force on Climate-Related Financial Disclosure.

The task force — known as the TCFD — was established by the international Financial Stability Board under Mark Carney, when he was Governor of the Bank of England. It was led by former New York City Mayor Michael Bloomberg, and recommended an approach that would allow investors to assess firms’ readiness for the impacts of climate change.

Canadian companies are going to have to up their game in this regard as we begin to emerge from the COVID-19 crisis and refocus on the looming devastation posed by climate change.

Ottawa is expecting corporations that apply for the large employer financial assistance to meet the “full TCFD” standards, said one senior federal official, speaking on a background basis. Firms will also “need to explain how corporate strategies etc. will contribute to Canada’s commitments under the Paris [Accord of 2015] and the goal of net zero by 2050,” the official said.

Liberal government has its own work to do in this regard. It has yet to indicate how it will meet its existing 2030 target, let alone a more ambitious one for that year or a net-zero goal for 2050.

Under the Paris deal, national governments are expected this year to announce strengthened commitments for emissions reductions. Prior to the COVID-19 outbreak, leaders in the private sector were announcing ambitious GHG reductions targets, though their actions often fell short of their talk.

Still, pressure is growing as major institutional investors, multinational corporations and more than 124 countries — including Canada — have endorsed the goal of “net zero” greenhouse gases by 2050. That means any remaining emissions from burning of fossil fuels or other sources would have to be offset by natural or technological methods of drawing carbon dioxide out of the air.

Mr. Carney, now a United Nations climate adviser, called recently for all companies to disclose their plans to reach net zero emissions. “Every company in every sector, every bank and every insurer, every pension fund, should be expecting to develop and disclose a transition plan to net zero,” he said in April during a virtual climate conference hosted by Germany and the United Kingdom.

The Norwegian pension fund blackballed the Canadian oil sands companies because it concluded that, despite efforts to reduce the GHG emissions per barrel from their operations, they remain carbon-intensive producers of crude compared to global averages and are lacking substantive plans for dramatic improvement.

Two emissions scenarios for Canada from an Environment Canada report in the spring of 2019.

The fund first published assessments for the four big Canadian producers last November and announced its decision based on those assessments on May 13.

With regard to Suncor for example, the fund acknowledged that the company has made progress in reducing its emissions per barrel and that it has pledged to its carbon-intensity cut by 30 per cent by 2030.

However, referring to the company’s climate commitments, the fund’s Council on Ethics said it “does not consider that the measures are sufficiently concrete or the emission targets sufficiently ambitious.” The council added that, “even if the company did realize its emission-reduction target, it would still not bring the company’s emissions down to the average level for conventional oil production.”

Albertans responded with anger to the Norwegian decision. Leaders like Premier Jason Kenney and Cenovus CEO Alex Pourbaix argued the Norwegian fund ignored the sector’s recent progress in reducing emissions intensity. And they said it is hypocritical for a country that continues to drill from crude in Arctic waters to cast stones at other producers.

But while the Norwegians continue to rely on oil for current revenues, they have long signalled their determination to lessen the climate-related risk to their pension funds by divesting from the most carbon-intensive forms of fossil fuels. And Norges Bank Investment management is not alone. Some of the world’s largest investors have signalled their support for fulsome disclosure and a net-zero agenda.

Suncor is considered a leader in climate-related financial disclosure. Last year, it issued an analysis of its exposure to risk and its plans to address it. However, due to economic fallout from the pandemic the company recently shelved investments that would have improved its emissions performance.

Its analysis included a consideration of the company’s expected fortunes should the world succeed in holding temperature increases below 2-degrees C by transitioning off fossil fuels. Under that scenario, Suncor said its current operations could continue to produce crude until 2040 but there would be no new oil sands projects. It promised to address the post-2040 period in this year’s report.

Other industries also face challenges. Utilities have to worry about the impact of extreme weather on their power lines; insurers point to the rising costs of flooding and fires; energy-intensive manufacturers face their own emissions regulations, and Canadian banks are heavily exposed to the country’s oil and gas sector and other sectors that face climate-related risks.

The announcements last week from the federal government and the Norwegian wealth fund were only the latest examples of a growing effort to reduce GHG emissions by holding corporations accountable.. They will not be the last.

Backed by the New Democrats, the Bloc Quebecois and the Green Party, the minority Liberal government appears determined to embed climate-change issues in its decision making. At the same time, sustainable finance principles are moving out of the fringe and into the mainstream.

As a result, companies that fail to adequately plan for the longer-term environmental crisis do so at their peril.

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